June 27, 2025
Article
From 6 April 2025, the UK’s Inheritance Tax (IHT) regime underwent a significant transformation, moving from a domicile-based system to one centered on tax residency status. This change marks a fundamental redefinition of who is liable for UK IHT and introduces new complexities for both UK residents and expatriates.
The End of Domicile-Based Taxation
Historically, exposure to UK IHT was determined by an individual’s domicile status. Broadly, domicile can be defined as the country that a person treats as their permanent home, or lives in and has a substantial connection with.
Non-UK domiciled individuals were generally only subject to UK IHT on UK-situated assets, with overseas assets excluded unless the individual was ‘deemed domiciled’ (resident in the UK for at least 15 of the previous 20 tax years).
From April 2025, this framework was replaced. The new rules introduced the concept of a Long-Term UK Resident (LTR), defined as someone who has been UK tax resident for at least 10 of the previous 20 tax years. Once classified as an LTR, an individual becomes liable for UK IHT on their worldwide assets, regardless of domicile status.
Implications for Long-Term Residents
For individuals meeting the LTR criteria, the scope of IHT expands significantly. Transfers of overseas assets— whether during lifetime or on death—will now fall within the scope of UK IHT. This includes assets held outright and those settled into trusts, even if the trust was established while the individual was non-UK domiciled.
The ‘Tail’ of Residence
The IHT reforms also introduced a “tail” period: being the duration for which an individual remains within the scope of UK IHT after ceasing to be UK resident for tax purposes. The tail length varies based on the length of prior UK residence.
If an individual has been UK tax resident for between 10 and 13 out of the last 20 tax years, then they will have a 3-year tail. The tail length then increases by one year for every additional year of UK residence. For those who have been UK tax resident for 20 years or more, the applicable tail period is 10 years.
This graduated approach means that individuals who leave the UK may still be liable for UK IHT on overseas assets for up to a decade after leaving, depending on their prior residence history.
Strategic Considerations
These changes necessitate a reassessment of estate planning strategies, particularly for internationally mobile individuals. Key considerations include:
- Monitoring UK residence years closely
- Consider IHT implications and scope in other countries
- Considering the timing of asset transfers and emigration
- Reviewing trust structures and settlor status
In summary, the 2025 IHT reforms represent a paradigm shift. The move to a residence-based system aligns the UK more closely with global norms but introduces new planning challenges.
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